When a reverse mortgage can make sense
Q: Our home has no mortgage. I am 86 and my wife is 79. Home value is about $260,000. Would we benefit from a reverse mortgage and what are disadvantages? Melvin Gatlin, Christiana, Tenn.
A: Not knowing all that's needed to give a complete answer, the short answer is yes.
"I believe there would be a benefit to you from a reverse mortgage," says John Salter, an associate professor in the Department of Personal Financial Planning at Texas Tech University.
He says the Home Equity Conversion Mortgage (HECM) program offers a way to use the equity in your home through a line of credit, a monthly payment called a tenure payment, and a source of cash if needed.
The first benefit, he says, is the line of credit. "There are many advantages to setting up a HECM line of credit, which include the lender cannot call, cancel or reduce the line such as in a traditional home equity line of credit, the line of credit actually grows over time based on the borrowing rate, and the payback is flexible and voluntary," says Salter. That, in essence, means you can pay back any borrowed money at your own will.
In your case, Salter says a line of credit can be useful as a source of emergency funding, a place to draw cash for needs if your portfolio has a severe loss and you would prefer not to sell, and it can be used down the road. If your portfolio gets depleted, you can live on the line of credit.
Other benefits: The program is non-recourse; the loan value will never exceed the home's market value. "So, if you sell or upon death the only amount that is owed is the loan balance up to the home value," says Salter.
There are, of course, downsides to reverse mortgages. If you borrow funds from the mortgage, Salter says you are creating a debt that has to be repaid in the future upon sale of the home or death.
Plus, the mortgages aren't necessarily free. A few lenders have a zero-cost or minimal-cost option to open a line of credit. But those reverse mortgages may or may not have a nominal monthly service charge, says Salter.
Plus, to get a low-cost reverse mortgage, Salter says you'd need to choose the higher lender borrowing rate, called margin. "This increases your borrowing cost ... if your plan is to have the line of credit is for emergencies or future financial protection," says Salter. "This may not be as big of an issue and may be to your benefit later in terms of a larger line of credit available to you."
The line of credit would also be beneficial if you are in a position where you and your wife are comfortable now, but want a safety net for possible future financial issues, says Salter. "If you are in need of shorter-term cash, you can still use the line of credit for this," he says. "But be aware there is a new rule where you can only use less than 60% of the benefit in the first year to avoid a higher up-front cost, and you may be better off long term paying up-front costs to obtain a lower rate if you would plan to use funds earlier."
Salter's bottom line: If your house is paid, and you are financially comfortable, setting up the no-cost reverse mortgage seems like a logical choice. "You may never need it, but it will be there if you do," Salter says. "Just remember any funds borrowed is debt in your grand financial picture."
To learn more about reverse mortgages, check out the government's website, which also has a list of lenders to contact.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Emailrpowell@allthingsretirement.com.